Cash Collateralized Tax-Exempt Bonds Combined with Low-Income Housing Tax Credit Cash Collateralized Tax-Exempt Bonds Combined with Low-Income Housing Tax Credit

Cash Collateralized Tax-Exempt Bonds Combined with Low-Income Housing Tax Credit

The use of tax-exempt bonds to finance qualified residential rental facilities combined with low-income housing tax credits (“LIHTC”) to finance costs of acquisition and renovation of affordable multifamily housing projects has become more prevalent in recent years. The common structure is to issue short-term tax-exempt bonds equal to 50% of the project costs with a maturity close to or shortly after the anticipated placed-in-service date of the project. The maturity date of such tax-exempt bonds is usually within 30 months. Typically, the bond documents create a Project Fund and a Collateral Fund that are invested in highly rated investments. A simultaneous deposit to the Collateral Fund is made equal to an amount of tax-exempt bond proceeds disbursed from the Project Fund to pay project costs. The Collateral Fund is typically funded with proceeds of a sponsor such as a governmental unit or housing authority or proceeds of taxable GNMA or FNMA securities or FHA/HUD loans.

Section 42(h) of the Code provides that if 50% or more of the aggregate basis of any building and the land on which the building is located is financed with the proceeds of bonds subject to the private activity bond volume cap, then the project qualifies for the 4% LIHTC without having to go through the competitive 9% LIHTC process. Regardless, the appropriate state agency will ultimately issue IRS Form 8609 Low-Income Housing Credit Allocation and Certification for the project. Generating additional equity without going through the competitive 9% LIHTC allocation process is attractive to many developers. This cash collateralized structure combining tax-exempt bonds with LIHTC creates equity and avoids negative arbitrage.
 
Ice Miller’s Multifamily Housing bond team has worked on numerous financings using this structure. For more information, please contact Michael Allen, Philip Genetos, Tyler Kalachnik, James Snyder, Kip Wahlers and Steven Washington or another member of the Ice Miller Municipal Finance Group.
 
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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